The Covid bet: How the pandemic has disrupted the Momentum-Value equity equation

Vaccine roulette

The traditional relationship between Momentum and Value factors is becoming increasingly blurred as the Covid-19 pandemic has upended equity markets, according to Unigestion.

New research from Unigestion’s equities team suggests investor confidence has been dented in recent weeks as the Delta variant has taken hold in several countries that had earlier been buoyed by the vaccine rollout. Earlier, the stock market rally towards the end of 2020 into 2021 – propelled by the vaccine push – had reversed the fortunes of certain so-called Covid “winner” and “loser” equities, such as healthcare and software.

Unigestion said this ‘winners and losers’ theme in equities, which emerged out of the disruption of the pandemic, has underpinned the performance of both Momentum and Value names for much of the past year – but is now being disrupted as investors shift their focus toward economic reopening and recovery.

“As sentiment changed following the ‘Vaccine Rally’, Value has enjoyed a strong run of performance. A natural conclusion might be that, as Momentum and Value have coalesced, Value’s relationship with the Covid bet has also weakened,” analysts observed in a market commentary.

“The result is an equity factor suite that is better diversified, capturing a greater set of effective bets.”

Unigestion data shows that, in January, Momentum still dominated the Covid bet, with roughly 60 per cent of longs and shorts remaining in their top and bottom deciles, respectively.

But by April, Momentum “had lost much of its Covid bet”, and by early July a large proportion of stocks held long basket in October had now been moved to the short basket – “a partial inversion of the portfolio held only six months earlier”, according to Unigestion’s data, underlining the extent of the shift.

“Healthcare stocks which might have benefitted from the pandemic have reverted sharply. Similarly, some software companies which initially benefited from the remote working scenario now constitute some of the poorest recent performers,” the note said. “While materials stocks may be considered more cyclical, we see precious metals miners transitioning from long to short.”

Analysts believes Momentum has changed character dramatically, partly as a result of the “neutralisation” of the Covid bet that dominated 2020.

“While its relationship with Value has also shifted, we do not see evidence that Value has lost its sensitivity to the Covid bet.”

Unigestion added: “Where Momentum gains would have once offset Value losses – and vice versa – the relationship between the two is likely to be much more blurry going forward. At the factor portfolio level, rather than having two broadly cancelling positions, we should enjoy a more diversified set of returns.”

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Hugh Leask
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Editor, Hedgeweek